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They finally did it. After decades of speculation and debate, the US Treasury late on Monday designated China a currency manipulator, topping up the tension in the trade wars.
Making the designation now is logically incomprehensible, has no or negative practical value and merely serves to underline the US’s inability to force China to do what it wants. Apart from that, it’s a great idea.
Even when China’s intervening against the renminbi was the number one concern of US international economic policy under George W Bush and Barack Obama — essentially the decade before 2013 — naming it a manipulator (under the Omnibus Trade and Competitiveness Act 1988, if you’re taking notes) was never really on the cards.
It was an omission the US Treasury traditionally wanted to hide. The regular announcement revealing that China had once again been let off the hook would typically be made on a Friday afternoon before a holiday weekend. But the Treasury regarded holding back from making the designation as simply part of being a grown-up.
Why? Because despite misinformed claims — including from the likes of Mitt Romney while standing for president, who said it allowed the US to levy antisubsidy duties on the country concerned — there are no practical consequences except having the US start negotiations either bilaterally or at the IMF. Such talks in themselves will achieve nothing. The fund’s regular assessment of member countries’ external positions uses an eclectic mix of approaches with wide confidence intervals, making them hard to weaponise for use in currency wars.
You could call that cowardice on the IMF’s part, or you could call it intellectual honesty. Unlike calculations for, say, antidumping, there is nothing close to an accepted single methodology for exchange rate misalignment. But there it is. International law to constrain deliberate exchange rate misalignment is weak, and the US designating a country a currency manipulator involves setting an almost entirely toothless dog on it.
Making the designation during the years of heavy Chinese renminbi intervention would have been intellectually defensible, if practically meaningless. Now it is both incoherent and impotent — indeed, counterproductive. The Treasury’s stated reason for the designation on Monday was implicitly that China ought to have been intervening more rather than less. In other words, “manipulation” now simply means failing to keep the exchange rate at a level the US Treasury secretary of the day deems appropriate.
Even so, if the US genuinely wants a stable renminbi it has got itself into a ludicrous position. The more it threatens trade conflict through actions like this, the more downward pressure there is likely to be on the renminbi, as the currency naturally moves to offset Chinese exporters’ loss of competitiveness from tariffs. Beijing actually has little desire to let the currency slide rapidly. But the cost of holding up a falling currency becomes higher the more the US is in effect talking it down — both in financial terms from the expense of intervention and political terms from the damage of being seen to do the US’s bidding.
It never made much practical sense to call China a currency manipulator. In current circumstances it makes none at all. The only conceivable reason could be that Donald Trump wants more political cover for imposing more tariffs. This move is dumb, disingenuous or both.
Georgieva odds-on for IMF role
Speaking of the IMF, the EU has selected Kristalina Georgieva as its candidate for managing director after an internal selection process convoluted even by its own standards. Since the US seems happy to keep the reciprocal stitch-up in place in return for the EU supporting its nominee, David Malpass, to the presidency of the World Bank, Ms Georgieva is now odds-on for the job.
The standard complaints have been made about the iniquity of the fix, and fair enough. But ending the arrangement, and opening the MDship to an emerging market candidate (strictly speaking a non-European EM candidate, given Ms Georgieva’s Bulgarian nationality) means recognising something uncomfortable. Emerging market governments collectively don’t like the job being a European stitch-up, true. But despite quixotic plans predicated on the contrary, there are things they individually like less — namely an MD from a rival EM.
We saw exactly this when Christine Lagarde was appointed IMF MD in 2011. Her principal opponent was the then Mexican central bank governor Agustín Carstens. He was eminently qualified, with an economics PhD from Chicago and a stint as IMF deputy managing director as well as his time at the Bank of Mexico. And yet he failed even to sew up support from the rest of Latin America. Why? Partly because of suspicion in Latin America about Mexico being a US stooge. Many LatAm governments would rather have a European than a Mexican. Similarly, India would rather have a European MD than a Chinese, and vice versa.
Ending the EU stranglehold on the MDship is a noble ambition, but reformers need to recognise that “anyone but a European” is not how most EM governments think.
The number: 2.5%
The drop in the broad MSCI index of developed and emerging market equities on Monday, its sharpest fall since February 2018.
China is using its currency to soften Donald Trump’s trade war (FT)
A deal to end the US-China conflict looks increasingly remote (FT)
Donald Trump overrode his advisers to order new tariffs on China (WSJ)
Adam Posen of the Peterson Institute on the Federal Reserve and the trade war (Trade Talks podcast)